FINANCIAL PAGE THE PRICELINE PARADOX I have no idea why Priceline.com chose William Shatner as its spokesperson, and last week when I sat down Wlth Jay Walker, the company's founder, I forgot to ask him. My guess is that it had to do with that "to boldly go . . ." business. Priceline.com, which is often dismissed as a glorified coupon-clipping service, delivers what Walker calls "buyer-driven pricing": you go on-line, say what you're willing to pay for something (plane tick- ets, apples, whatever), and then find out if your offer is accepted. Walker maintains that this represents nothing less than a new stage in the evolution of capitalism. He may be half right. The retail regime Walker is trying to overturn was founded by another pric- ing prophet, John Wanamaker, who popularized his system more than a century ago. It was called the price tag, and it wasn't widely adopted until the last Gilded Age, after Wanamaker de- cided to put one on all the items in his Philadelphia emporium. Before then, prices were set mostly through bargain- ing. A salesman would size you up as you came through the door, and then the haggling would start. Wanamaker, a civic-minded Presbyterian, considered this inefficient and discourteous. So he gave all his products fixed prices and trumpeted them in his advertising. Within a decade or so, the fixed-price revolution had taken hold in the major cities of Europe and the United States. But how do sellers know what to put on the pnce tags? The process is some- thing like voting. Out of the cacophony of yes-no decisions that a buyer makes (between a hundred and five hundred a week, Walker figures), a collective judg- ment emerges about the appropriate price of everything from flat-screen TVs to Cap'n Crunch. Price, as economists like Friedrich Hayek insisted, conveys infor- mation. The trouble is that fixing prices makes them less infonnative. Sony's stock price fluctuates each moment as people buy and sell; Sony's TV prices don't. But Wanamaker's revolution created a bigger problem. With a price tag, some customers are being undercharged, be- 34 THE NEW YOR.KER., MAY 22, 2000 cause they would have been willing to pay more, and others aren't paying at all, because they won't buy the item at that price. Hence the great challenge of modern retail: how to discount to the cheapskates without giving a free ride to the spendthrifts. Over the past century; companies have tried various ways of doing this. Witness the coupon, which cleverly deters :&ee rid- ers by imposing a minor inconvenience: only price-sensitive customers keep their scissors handy. Then, there's the tech- nique that the economist Hal Varian calls "versioning": think of the different prices that FedEx charges for moming and af- ternoon deliverJ Versioning lures thrifty souls while assuring the high-end custo- mers that they're getting more for paying more. Butversioning is no radical advance: \.\. \ )( t , prices remain fixed; there are just a few more of them. That's why Walker, stretch- ing the point, says, "In a retail econom)T, all goods are always mispriced." Walker's solution to the mispricing problem is deceptively simple. In the In- ternet era, he realized, you can find out how much people are willing to pay for goods directly-by asking them. And that's the essence of Jay Walker's coun- terrevolution. There are a few crucial refinements, of course. To protect sellers from spendthrifts who are slumming as a lark, Priceline.com injects uncer- tainty into the system: you don't know for sure which hotel you'll stay at, or which airline you'll fly on-and the less you offer the less likely that your offer will be accepted. What's more, If you offer too lime for an item and are re- jected, you can't make another offer for a set period of time. These rules make it h d " " h ar to game t e system. Now, because Priceline.com began by selling airline tickets and hotel rooms, some people have assumed that the model would work only with perishable goods. Airlines don't like to fly planes with empty seats: that's money gone forever, so they're motivated to discount heavi1 Yet what about businesses selling goods that are as valuable today as they were yesterday? Ah, but there's no such thing. Any un- sold product loses value, because it costs money simply to store and display it and because the money tied up in inventory can't be put to work elsewhere. All things being equal, any business would prefer to sell everything it has on hand right now. And what customer wouldn't like a chance to name his own price? "Price über alles," Walker says in that retiring way of his. "Savings have driven every economic revolution." Everyone wins. Hello, Walker. Goodbye, Wanamaker. Onl)T, not so fast. John Wanamaker knew what he was about: consumers like fixed prices, above all because we worry about being played for fools. It's why Americans hate buying cars, which is the closest they're likely to come to bargain- ing in a Middle Eastern bazaar. Early in our conversation, Walker picked up a book-entitled, fittingly, "Digital Capi- tal"-and pointed to the price printed on the dust jacket. "This will not be here in the future," he said. He's wrong there. What allays the anxiety of "buyer-driven" pricing is that you can always compare your offer with the retail price. "Maybe my offer should have been even lower," you tell yourse "but at least I know that Del- ta would have charged me more." You'll accept the uncertainty that Priceline.com demands--uncertainty about brand, about time of flight, etc.-only if you have the certainty that you're getting a bargain. So buyer-driven pricing ultimately requires the existence of a fixed retail price. Then again, if just ten per cent of sales in this country became buyer- driven we're still talking about almost a trillion dollars. Jay Walker isn't knock- ing down John Wanamaker's store. He's standing on top of it. -James Surowiecki w 1= --' w <( I U